rdr status update frameworks/temp... · april 2018 set conduct pre-requisites that must be met in...

Retail Distribution Review:

Status update - June 2018

RDR STATUS UPDATE June 2018

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1. BACKGROUND AND PURPOSE OF THIS DOCUMENT

The former Financial Services Board (FSB) published its Retail Distribution Review (RDR) in

November 2014. The RDR proposed a number of regulatory reforms related to the distribution

of financial products and the provision of financial advice. The RDR was informed by the FSB’s

Treating Customers Fairly (TCF) initiative, targeted at ensuring that the financial sector delivers

clearly articulated fair outcomes for financial customers.

The RDR reforms were expressed as a set of 55 inter-related regulatory proposals, to be

implemented through a multi-year regulatory reform process. Since the publication of the initial

RDR proposals the FSB has published a number of RDR progress reports, updated proposals,

and various specific regulatory measures through different regulatory instruments.

The Financial Sector Conduct Authority (FSCA) is continuing to roll out the RDR reforms,

underpinned by its statutory mandate to promote the fair treatment of financial customers by

financial institutions. Similarly to the FSB’s approach, the FSCA will continue to implement the

RDR proposals in a phased manner, aligning the development of regulatory instruments to

broader legislative and regulatory developments giving effect to the Twin Peaks model of

financial sector regulation. The RDR proposals will therefore be implemented using an

appropriate combination of instruments under existing financial sector laws and standards under

the Financial Sector Regulation Act (FSR Act) and the planned future Conduct of Financial

Institutions Act (CoFI Act).

This document summarises the current implementation status of the 55 RDR regulatory

proposals initially published in 2014 and planned RDR developments for the remainder of 2018.

Comments or questions:

This document is provided for information purposes, rather than to invite stakeholder input.

Nevertheless, if you do have any comments or questions on the document, please feel free to

submit them to [email protected].

mailto:[email protected]


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2. RDR STATUS UPDATE TABLE

This Table sets out the current status of all the proposals contained in the initial RDR document published by the FSB in

November 2014.

The Table is structured as follows:

Column 1: Sets out the initial RDR proposal number and short description, as at November 2014. Where the description of a

proposal has changed in light of subsequent RDR updates, the change is shown in Column 1 as “Restated”.

Column 2: A number of the RDR proposals comprise two or more sub-elements, which may be at different implementation

stages. Column 2 sets out these sub-elements.

Column 3: Sets out the current status of each proposal and, where applicable, each sub-element of the proposal, using the

following key:

N/A = Proposal / element no longer applicable or no longer being pursued

1 = Proposal / element being deliberated within the FSCA, no significant public developments since initial proposal

2 = Informal stakeholder consultation at an early stage

3 = Informal stakeholder consultation and / or technical work at an advanced stage

4 = Formal public consultation in progress

5 = Final regulatory instrument published, subject to transitional periods before coming into operation

6 = Final regulatory instrument published and operational.

Column 4: Provides further explanatory detail on the status of each proposal or sub-element.


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Table:

Initial RDR proposal Sub-elements Status Detail

A. Forms of advice defined N/A

Different forms of advice will not be formally defined. Where

appropriate, standards relating to advice generally will include

requirements where advice is provided on an ongoing basis or

up-front. Exception: Financial planning will be defined (see

proposals T and U).

B. Standards for “low advice”

distribution models

N/A

This proposal will not be pursued. Instead, we are consulting on

changes to s.8(4) of the FAIS General Code of Conduct to clarify

that existing suitability analysis requirements are flexible enough

to be scaled to the circumstances of each transaction.

C. Standards for “wholesale”

financial advice

4 See proposed changes to s.8(1)(a) of the FAIS General Code of

Conduct, published for consultation in November 2017.

D. Standards for sales

execution

Defining sales execution 6

See amended FAIS Fit & Proper standards, which define

“execution of sales”. The definition came into operation on 1 April

2018.

Fit and proper

standards for sales

execution

5

See amended FAIS Fit & Proper standards. These include fit and

proper standards for “execution of sales” which come into

operation between April and August 2018. Within these, specific


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standards apply to execution of sales carried out using a script.

Other conduct

standards for sales

execution

1

The FAIS Fit & Proper standards which came into operation in

April 2018 set conduct pre-requisites that must be met in order to

qualify for somewhat more lenient competency requirements in

relation to execution of sales in terms of a script. We are however

internally considering whether more direct conduct standards for

sales execution are required – including in relation to establishing

the customer’s financial capability. Standards for execution of

orders in respect of securities, similar to those under MiFiD II, are

also being considered. A decision on whether there should, in

addition, be a direct limitation on these distribution models to

simpler products (as proposed in the initial Proposal D) will be

taken after we have gained more supervisory experience on the

effect of the revised Fit & Proper standards.

E. Standards for ongoing

product servicing

Standards for servicing

by intermediaries

3

Although certain of the FAIS General Code of Conduct changes

being consulted on have an impact on servicing matters (for e.g.

standards for advertising and marketing and for complaints

management), further proposals will be informed by the outcomes

of the intermediary activity segmentation analysis in progress.

Standards for servicing

by product suppliers See

These standards are being introduced on an ongoing basis

through various sectoral instruments to support a range of other


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Detail regulatory reforms. These include amendments to Insurance

PPRs, various retirement fund instruments (including TCF

guidance), collective investment scheme instruments, etc. which

are at various stages of implementation.

F. Insurance premium

collection to be limited to

qualifying intermediaries

4

See Tranche 2 of the proposed amendments to the LTIA and

STIA Regulations respectively that were published for formal

consultation on 23 March 2018.

G. Revised standards for

investment platform

administration

1

Will be informed in part by informal consultation currently in

progress on a draft discussion document on Investment

Management and Investment Advisers. (Relationships with LISPs

form part of this work).

H. Standards for product

aggregation and comparison

services

2

Fact-finding research and engagements on current business

models have commenced, to inform the development of

standards.

I. Standards for referrals and

lead generation

Referrals and leads in

context of limiting tied

advisers to their home

supplier’s products only

2

Initial thoughts have been shared in various RDR updates.

Further proposals will be consulted on in an Adviser

Categorisation discussion paper to be published in the third

quarter of 2018.

Other standards for 1

Under consideration.


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referrals and leads

J. Outsourced services obo

product suppliers to be more

clearly identified and regulated

Insurance binder

arrangements 5

See various provisions relating to binder arrangements in:

Tranche 1 amendments to the LTIA and STIA Regulations,

that became effective 1 January 2018, with specific

provisions coming into operation between January 2018 and

January 2020.

Section 1.3 in Chapter 1 and Rule 13 of the amended LTIA

and STIA PPRs, effective 15 December 2017 and 15

December 2019 respectively.

Other outsourcing in the

Insurance sector

3

Additional standards to be informed by the intermediary activity

segmentation analysis currently underway and insights obtained

through supervision of Tranche 1 amendments to the LTIA and

STIA Regulations.

Outsourcing in the

Investments sector

3

Consultation in progress on outsourcing in the investments

sector, particularly relating to third party co-branding

arrangements in the collective investment schemes space, as

part of consultation on a draft discussion document on Investment

Management and Investment Advisers. A public discussion

document will be published by mid-2018. In addition, the FAIS Fit

& Proper Requirements that came into effect on 1 April 2018 set


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specific requirements for all FSPs regarding the outsourcing of

functions.

General outsourcing

standards

6

General outsourcing standards are provided for in the new FAIS

Fit & Proper Requirements which came into effect on 1 April

2018. General outsourcing standards for the insurance sector, to

date set out in Directive 159, have been included in the Prudential

Standards issued under the Insurance Act. Also note that the

FSR Act contains far-reaching regulatory standard setting,

supervisory and enforcement powers in relation to outsourcing

arrangements. The intermediary activity segmentation analysis

currently underway, although focused on the Insurance sector,

may also inform broader outsourcing conduct standards.

K. Types of adviser defined:

independent, multi-tied or tied

Restated: Types of adviser

defined: Product supplier

agent (PSA or tied adviser);

registered financial adviser

(RFA or non-tied adviser).

3

Extensive stakeholder engagement has taken place. An updated

Adviser Categorisation discussion paper will be published for

public consultation in the third quarter of 2018.

Note: The final terminology to be used to describe different

categories of financial advisers is to be informed by consumer

testing. The terms “Registered Financial Adviser” and “Product

Supplier Agent” are therefore preliminary proposals at this stage.


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L. An IFA may advise on

certain products on a multi-

tied basis

N/A No longer applicable in light of revised approach to adviser

categorisation.

M. Criteria for IFAs to offer

sufficient product and product

supplier choice

N/A No longer applicable in light of revised approach to adviser

categorisation.

N. Criteria for IFAs to be free of

product supplier influence

Restated: Criteria for an RFA /

non-tied adviser to be entitled

to use the descriptor

“independent”

4

See proposed new s.3(5) of the FAIS General Code of Conduct,

published for consultation in November 2017. We are

considering whether these requirements should be further

strengthened.

O. Status disclosure to be

made by IFAs

N/A See restated Proposal N.

P. Criteria for multi-tied

advisers

Restated: Criteria for RFAs /

non-tied advisers

3 An updated Adviser Categorisation discussion paper will be

published for public consultation in the third quarter of 2018.


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Q. Status disclosure to be

made by multi-tied advisers

Restated: Status disclosure to

be made by RFAs / non-tied

advisers

1

To be considered in an updated Adviser Categorisation

discussion paper to be published for public consultation in the

third quarter of 2018.

R. Criteria for tied advisers 3

An updated Adviser Categorisation discussion paper will be

published for public consultation in the third quarter of 2018,

providing further details.

S. Status disclosure to be

made by tied advisers

1

To be considered in an updated Adviser Categorisation

discussion paper to be published for public consultation in the

third quarter of 2018.

T. Criteria for financial

planners

2

Proposed approach is that financial planning will not be a

separate adviser licence category, but rather that the descriptor /

designation “financial planner” or “financial planning” will be

reserved for advisers meeting prescribed professional body

criteria.

U. Status disclosure to be

made by financial planners

2 See Proposal T.


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V. Insurer tied advisers may no

longer provide advice or

services in relation to another

insurer’s products

6 See amended definition of “representative” in the LTIA

Regulations, which came into operation on 1 January 2018.

W. “Juristic representatives”

to be disallowed from

providing financial advice

3



providing further detail.

X. Standards for juristic

intermediaries (adviser firms)

2

These standards will develop in parallel with the adviser

categorisation model and other standards applicable to individual

advisers.

Y. Advisers may not act as

representatives of more than

one juristic intermediary

(adviser firm)

1

Changes to the FAIS Act to give effect to this proposal are under

consideration. These include provisions to enable the Authority

to prohibit representatives generally – or particular categories or

types of representatives – from: (i) acting on behalf of more than

one provider;(ii) acting on behalf of particular types of providers;

or (iii) rendering particular financial services. As an alternative to

amending primary legislation, the option of issuing an appropriate

conduct standard under the FSR Act is also being considered.

Z. Restricted outsourcing to Various See detail under Proposal J, setting out various developments for


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financial advisers. stages.

See

Detail

different forms of outsourcing.

Also note new Part 3D of the LTIA Regulations and Part 5C of the

STIA Regulations (which came into operation on 1 January

2018), requiring insurers to notify the regulator of any intent to

remunerate an intermediary for services other than services as

intermediary or a binder function.

Further restrictions may be considered subject to finalisation of

the intermediary activity segmentation analysis and insights

obtained through supervision of Tranche 1 amendments to the

LTIA and STIA Regulations.

AA. Certain functions

permitted to be outsourced to

financial advisers

Various

stages.

See

Detail

See detail under Proposal J, setting out various developments for

different forms of outsourcing.

BB. Product supplier

responsibility for tied advisers

See

Detail

This matter is not expected to be contentious or require detailed

standards. Product suppliers clearly bear full legal accountability

for advice provided by their tied advisers in accordance with

ordinary agency principles.


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CC. Product supplier

responsibility for multi-tied

advisers

Restated: Product supplier

responsibility for RFAs / non-

tied advisers

Specific responsibilities

for insurers

5

Note the following provisions of the PPRs:

Rule 1.4(d) and 1.9 of the LTIA and STIA PPRs, coming into

operation on 15 December 2017 and 15 December 2018

respectively, describing the insurer’s responsibility in relation

to advice provided.

Rule 12.2.1 of the LTIA and STIA PPRs, which came into

operation on 15 December 2017 for new intermediary

agreements and will come into operation on 15 December

2018 for existing intermediary agreements, which require

insurers to ensure that intermediaries with whom they

contract comply with FAIS product knowledge requirements.

Rule 18 of the LTIA and STIA PPRs, coming into operation

on 15 December 2018, which includes requirements for

insurers to have processes in place to deal with customer

complaints relating to advisers.

Additional product

supplier responsibility

standards

2



providing further details on proposed product supplier

responsibility (including in relation to insurers).


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DD. Product supplier

responsibility for IFAs

Restated: Product supplier

responsibility for RFAs entitled

to use the descriptor

“independent:

2



providing further details. Note however that, in the Insurance

sector, the specific insurer responsibilities outlined under

Proposal CC would apply equally to “independent” RFA channels

used by the insurer.

EE. Product supplier

responsibility for non-advice

sales execution

1

Standards to be considered together with additional standards for

non-advice sales execution under Proposal D. Note however that,

in the Insurance sector, the specific insurer responsibilities

outlined under Proposal CC apply equally to non-advice

distribution channels used by the insurer.

FF. General product supplier

responsibilities in relation to

receiving and providing

customer related data

Standards in the

Insurance sector

5

See general data related responsibilities in the LTIA and STIA

PPRs and specific data related provisions relating to binder and

outsourcing arrangements in the LTIA and STIA Regulations, all

coming into operation in January 2020.

Standards for other

sectors

1

We are considering appropriate instruments for data related

responsibilities for product suppliers generally. Note that the

provisions of the POPI legislation are also applicable.

GG. Ownership structures to See Potential conflicts arising from ownership arrangements are being


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be reviewed to assess

conflicts of interest

Detail taken into account in the development of various other RDR

proposals – including (among others) those relating to adviser

categorisation, product supplier responsibility and use of the

descriptor “independent”. We have accepted that the mere

existence of an ownership relationship between a product

supplier and an adviser firm does not in and of itself mean that

the adviser firm is “tied” to the product supplier.

HH. General disclosure

standards in relation to fees or

other remuneration

FAIS enhancements 4

See proposed strengthened remuneration disclosure provisions in

s.7 of the FAIS General Code of Conduct, published for

consultation in November 2017.

Additional disclosure

standards

1 Additional standards will be developed in parallel with standards

for Proposals JJ and KK.

II. Standards for financial

planning / risk planning fees

1 Standards will be developed in parallel with standards for

Proposal T.

JJ. Standards for up-front and

ongoing product advice fees

FAIS enhancements 4

See proposed general remuneration principles in s.3A of the FAIS

General Code of Conduct, published for consultation in

November 2017.

Advice fees in the

Insurance sector

2 Further amendments to the Regulations under the LTIA and STIA

will be required to allow for the payment of advice fees separately


15


from commission. Findings from the intermediary activity

segmentation analysis and the technical work on insurance life

risk commission models will also inform advice fee standards.

Additional advice fee

standards

1 The need for additional advice fee standards will be considered.

KK. Additional standards for

ongoing advice fees

Various

stages As for Proposal JJ.

LL. Product suppliers to

facilitate advice fees

Facilitation of advice

fees for investment

products

3

Consultation in progress as part of consultation on a draft

discussion document on Investment Management and Investment

Advisers. A public discussion document will be published by mid-

2018.

Facilitation of other

advice fees

1 Standards to be developed in parallel with Proposals JJ, MM, NN

and UU.

MM. Remuneration for selling

& servicing investment

products

3

Consultation in progress as part of consultation on a draft

discussion document on Investment Management and Investment

Advisers. A public discussion document will be published by mid-

2018.


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NN. Remuneration for selling &

servicing risk policies

3

Technical work on developing an actuarial model to test new life

risk commission model impacts, in consultation with ASISA, is

near completion. The model will be made available to a broader

range of stakeholders to commence actual testing. Further

technical work is also planned to apply the intermediary activity

segmentation analysis undertaken for short-term insurance to the

long-term sector (See Proposal UU).

OO. Product supplier

commission prohibited on

replacement life risk policies

Interim measure:

Insurers to monitor

quality of replacement

disclosures

5 See Rule 19 of the LTIA PPRs, initially scheduled to come into

operation on 15 June 2018 but now deferred to 1 January 2019.

Defining replacement 5

See definition in the LTIA PPRs (that will come into operation on

1 January 2019) and in the proposed changes to the FAIS

General Code of Conduct (published for comment in November

2017). The publication of guidance in this regard is also currently

under consideration.

Remuneration on

replacement life risk

policies

2

A decision on potential remuneration interventions on

replacements will be informed by the modelling work to be

undertaken for Proposal NN. In the interim, Regulation 3.9A

under the LTIA Regulations (initially scheduled to come into


17


operation on 1 July 2018 but now deferred to 1 January 2019)

provides in effect for non-payment of commission on replacement

risk policies in the event of non-compliance with prescribed

replacement disclosure standards.

PP. Commission regulation

anomalies on “legacy”

insurance policies to be

addressed

6

See Regulation 3.10(1)(b) and definition of “variable premium

increase” in Regulation 5.1 of the Regulations under the LTIA,

which came into operation on 1 January 2018.

QQ. Conflicted remuneration

on RA transfers to be

addressed

1

Under consideration. Note that definition of “replacement” in the

proposed amendments to the FAIS General Code of Conduct,

published for comment in November 2017, confirms that such

transfers constitute a replacement.

RR. Equivalence of reward to

be reviewed

Strengthening

regulator’s powers to

determine what

constitutes

“Equivalence”

6 See Regulations 3.2(4A) and (5) and 3.11(2) of the LTIA

Regulations, which came into operation on 1 January 2018.

Interim measure to

address specific

practices

4

Formal consultation on a proposed Determination took place

during November and December 2017. Based on feedback

received, we have decided to conduct further research into


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current tied adviser remuneration practices before confirming

whether or how interim measures will be implemented.

Equivalence of Reward

to apply at individual

adviser level

2

Approach to be informed by the planned research. Note that we

are no longer of the view that implementation of equivalence at

individual adviser level needs to be deferred to implementation of

Proposal NN.

SS. Standards for

remuneration arrangements

between adviser firms and

individual advisers

See

detail

Standards to be developed in parallel with standards for the

various other RDR proposals relating to remuneration.

TT. Special remuneration

dispensation for the low

income market

Dispensation for

investment / savings

products

2

Initial industry consultation has taken place. A discussion paper

will be published for public consultation in the third quarter of

2018, providing more detailed proposals.

Dispensation for life risk

products

4

See proposed commission regulations relating to micro-insurance

and funeral policies in the proposed Tranche 2 amendments to

the LTIA Regulations.

UU. Remuneration for selling &

servicing short-term insurance

policies

“Section 8(5) fees” 5

Provision for these fees has been repealed and replaced with

PPR provisions stipulating circumstances in which fees other than

commission may be charged. See Rule 12.4 of the STIA PPRs,


19


coming into operation on 15 December 2018.

Intermediary activity

analysis

3

Findings of the intermediary activity segmentation analysis have

been shared with industry. An analysis on comments received is

currently underway. Further industry engagements are planned in

this regard.

Additional short-term

remuneration standards

2 Standards to be informed by findings of the intermediary activity

segmentation analysis, in addition to further technical work.

VV. Conditions for short-term

insurance cover cancellations

Restated: Conditions for

insurance cover cancellations.

5

See Rule 19 of the STIA PPRs and Rule 20 of the LTIA PPRs,

coming into operation on 15 December 2019. Note that the

standards apply to both long-term and short-term insurance.

WW. Remuneration for direct

non-advice sales execution

1 Standards to be considered together with additional standards for

non-advice sales execution under Proposal D.

XX. Remuneration for referrals,

leads, product aggregation and

comparison services

2 Standards to be considered together with standards under

Proposals H and I.

YY. Remuneration for

investment platform

1 Standards to be developed in parallel with standards under

Proposal G.


20


administration

ZZ. Binder fees to multi-tied

intermediaries to be capped

Restated: Binder fees to

financial advisers to be capped

5

See new Part 3C of the LTIA Regulations and Part 5B of the STIA

Regulations, coming into operation between 1 January 2018 and

1 January 2019. Note that these Regulations must be read with

the strengthened operational and governance requirements

imposed by Part 6 of the Regulations.

AAA. Commission cap for

credit life schemes with

“administrative work” to be

removed

5

See revised commission caps for credit schemes in the

commission Table (Annexure 1) of the LTIA Regulations, coming

into operation on 1 January 2019.

BBB. Outsourcing fees for

issuing insurance policy

documents

N/A

This activity is generally regarded as incidental to a binder

activity. In instances where the insurer believes that additional

remuneration should be paid because the nature of the work

required to issue such documentation falls outside the scope of

binder or intermediary activities, details of such remuneration

must be notified to the FSCA in terms of the new Part 3D of the

LTIA Regulations and Part 5C of the STIA Regulations (which

came into operation on 1 January 2018). A formal notification

template setting out the detailed criteria that will be considered in

this regard is planned to be published during the first half of 2018.


21


CCC. General standard re

financial interests

1 Under consideration.


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3. NEXT STEPS FOR 2018

As indicated in the Table above, the following RDR developments are planned for the remainder

of 2018. This is not a closed list of actions and additional implementation steps may be

communicated in the course of the year.

Before end June 2018:

Publication of a discussion paper on RDR Proposals relating to Investment Management

and Investment Advisers. The purpose of the paper will be to elicit stakeholder input on:

possible regulatory proposals to define the activity of “investment management”;

considering the extent to which investment management needs to be demarcated

from other forms of discretionary investment mandates;

clarifying the nature of the legal and business relationships between different types

of entities in the investments sector; and

resulting fee and remuneration implications.

Remainder of 2018:

Finalising the RDR related changes to the FAIS General Code of Conduct.

Ongoing technical work on intermediary activity segmentation.

Completion of the actuarial model for testing new life risk commission model impacts, and

commencement of the testing process.

Research into current tied adviser remuneration practices in the long-term insurance sector,

to inform next steps on the proposal to strengthen the principle of Equivalence of Reward

(RDR Proposal RR).

Publication of a discussion paper on Adviser Categorisation. The paper will present

updated proposals on:

practical aspects of the previously proposed two-tier adviser categorisation model;


21

possibly allowing product supplier agents to advise on products of another product

provider in respect of different classes of financial products;

product supplier responsibility in relation to different categories of adviser;

use of referrals and leads to meet “gap filling” needs in tied advice models;

conditions for using the descriptors “independent” or “financial planning” to describe

advice; and

implications for juristic representatives and group structures.

Consumer testing of an RDR communication brochure and levels of consumer

understanding of different terms used to describe different types of advisers.

Publication of a discussion paper on an RDR Remuneration Dispensation for the Low

Income Market (RDR Proposal TT). The paper will take into account the FSCA’s broader

financial inclusion and transformation priorities, including the proposed micro-insurance

conduct standards being introduced through the LTIA and STIA PPRs.

4. GLOSSARY

In this document, the following acronyms have the following meanings:

ASISA CoFI Act FAIS

Association for Savings and Investment South Africa Conduct of Financial Institutions Act Financial Advisory and Intermediary Services Act, 37 of 2002

FSB

Financial Services Board

FSCA FSR Act LISP

Financial Sector Conduct Authority Financial Sector Regulation Act, 9 of 2017 Linked Investment Service Provider

LTIA

Long-term Insurance Act, 52 of 1998

MiFiD II POPI

Markets in Financial Instruments Directive (2004/39/EC) Protection of Personal Information Act, 4 of 2013


22

PPRs

Policyholder Protection Rules, published under the LTIA and STIA respectively

RDR

Retail Distribution Review, published by the Financial Services Board in November 2014

STIA

Short-term Insurance Act, 53 of 1998

TCF Treating Customers Fairly

rdr status update frameworks/temp... · april 2018 set conduct pre-requisites that must be met in...

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